Opinion
NOT FOR PUBLICATION
Submitted Without Oral Argument: February 22, 2007
Appeal from the United States Bankruptcy Court for the Central District of California. Honorable Ellen Carroll, Bankruptcy Judge, Presiding. Bk. No. LA 06-12383-EC.
Before: PAPPAS, MARLAR[ and BRANDT, Bankruptcy Judges.
The Honorable James M. Marlar, United States Bankruptcy Judge for the District of Arizona, sitting by designation.
MEMORANDUM
This is an appeal from an order dismissing the chapter 11 bankruptcy case filed by debtor Cabalar Enterprises, Inc. d/b/a Suneyewear, a California corporation (" Cabalar") on the ground that Cabalar " lacked counsel." We REVERSE the dismissal order and REMAND the case to the bankruptcy court.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
FACTS
Cabalar filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on June 5, 2006. The petition was executed by its President, Melchor Cabalar, and also by its attorney, Esperanza V. Bada (" Bada"), on June 2, 2006. Bada also filed two somewhat contradictory statements with the petition. In one, the Disclosure of Compensation of Attorney for Debtor, Bada indicated that she had agreed to represent Cabalar for $3,000, but that fee did not include services for representation of Cabalar at the meeting of creditors, confirmation hearing, adversary proceedings and contested bankruptcy matters. In the other, a Declaration re: Limited Scope of Appearance Pursuant to Local Bankruptcy Rule 2090-1, Bada indicated that, for the agreed fee, she would provide only certain legal services: she would prepare and file the petition and schedules, and represent the debtor at the § 341(a) hearing.
On June 8, 2006, a creditor, Plaza West Covina, LP, filed a notice of motion and motion for relief from the automatic stay in Cabalar's case. A hearing was set for the motion on shortened notice for June 21, 2006, at 10:00 a.m. On June 16, 2006, Bada responded to the motion on behalf of Cabalar, and moved to continue the hearing. Attached to the motion for continuance was Bada's Memorandum of Points and Authorities/Statement of Facts, in which Bada declared that she and Cabalar were scheduled to meet with the U.S. Trustee on June 21 at 10:30 a.m. at a distant location from the courthouse where the stay motion hearing was scheduled to be heard. She noted that because timely compliance with the requirements of the U.S. Trustee was required under Local Bankruptcy Rule 2015-2(a)(2), if Cabalar failed to attend the interview, the U.S. Trustee might seek dismissal of the case. Bada suggested that the stay relief hearing be reset for July 7, 2006, a date which the clerk had apparently indicated to her was available.
On June 7, 2006, the bankruptcy court, acting sua sponte, issued an Order to Show Cause re: Dismissal (" OSC") in Cabalar's case. The order set a hearing on June 14, 2006, and required Cabalar to show cause why the chapter 11 case should not be dismissed due to the " debtor's lack of counsel as required by Rule 2090-1(g)(1)" of the Local Bankruptcy Rules. The OSC cautioned that Cabalar's failure to attend the hearing may result in dismissal of the case. The certificate of mailing executed by the clerk attached to the OSC indicated that, although the OSC was signed on June 7, 2006, it was not entered until June 8, 2006, and that it was not mailed to the parties, including Cabalar and Bada, until June 9, 2006, a Friday. The certificate also indicated that the OSC had been mailed to Bada as " debtor's attorney."
The record is unclear when the OSC reached Bada's office. However, Bada attached a declaration to Cabalar's Opening Brief, o She is the attorney for Cabalar in the bankruptcy case.
o She signed the chapter 11 petition as Cabalar's attorney of record.
o On June 14, 2006, at approximately 2:15 p.m., her secretary gave her a copy of the OSC which had arrived in her office mail between 1:00 and 2:00 p.m. that day.
o The postmark on the envelope containing the OSC was June 12, 2006 in the afternoon.
o Bada indicates that a copy of the envelope was attached to the Declaration. However, it was not attached.
The Clerk of the Panel contacted Bada's office staff in hopes that the record could be supplemented with a copy of the envelope. Ultimately, the Clerk was informed that the envelope could not be located.
The hearing on the OSC occurred as scheduled on Wednesday, June 14. Bada did not appear at the hearing. An order dismissing the bankruptcy case was signed by the bankruptcy judge on June 16, 2006, entered on June 19, 2006, mailed to Bada, again as debtor's attorney, on June 21, 2006, and received on June 23, 2006.
Cabalar filed a timely appeal of the dismissal order on June 29, 2006.
We note that no party appeared to represent the interests of any appellee. Therefore, we have only the brief and excerpts of record supplied by Cabalar. in which she states under penalty of perjury that:
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § § 1334 and 158(b)(1). We have jurisdiction pursuant to 28 U.S.C. § 158(b).
C.D. Cal. LBR 2090-1(g)(1).
ISSUES
Whether the bankruptcy court abused its discretion in dismissing the chapter 11 case because Cabalar " lacked counsel."
Whether the bankruptcy court provided Cabalar and its attorney with adequate notice of the hearing on the OSC.
STANDARDS OF REVIEW
We review orders of dismissal for abuse of discretion. Guastella v. Hampton (In re Guastella), 341 B.R. 908, 915 (9th Cir. BAP 2006). A bankruptcy court abuses its discretion if it bases its decision on a clearly erroneous view of the facts. Khachikyan v. Hahn (In re Khachikyan), 335 B.R. 121, 125 (9th Cir. BAP 2005).
Whether a particular procedure comports with due process is a legal question that we review de novo. Beneficial Cal., Inc. v. Villar (In re Villar), 317 B.R. 88, 92 (9th Cir. BAP 2004).
DISCUSSION
A.
The bankruptcy court abused its discretion in dismissing Cabalar's chapter 11 case " due to lack of counsel."
The bankruptcy court's OSC directed Cabalar " to show cause why this chapter 11 case should not be dismissed due to the debtor's lack of counsel as required by Rule 2090-1(g)(1) of the Local Rules of the United States Bankruptcy Court, Central District of California." (Emphasis added.)
The Rule provides that " [a] corporation, partnership or unincorporated association may not file a petition or otherwise appear without counsel in any case or proceeding. . . ." Bankr.
Following the hearing on the OSC, on June 16, 2006, the court entered an order dismissing Cabalar's chapter 11 case which reads as follows:
This court's order to show cause and explain why this Chapter 11 case should not be dismissed due to the debtor's lack of counsel as required by Rule 2090-1(g)(1) of the Local Rules of the United States Bankruptcy Court, Central District of California came on for hearing on June 14, 2006. There was no appearance by the debtor. For the reasons set forth on the record at the hearing, and good cause appearing, IT IS HEREBY ORDERED that this Chapter 11 case is dismissed.
(Emphasis added.)
Both the OSC and the order dismissing the case indicate that the court dismissed the case because Cabalar was not represented by counsel. In so doing, the bankruptcy court abused its discretion by committing plain error. A court commits plain error when it forms a judgment " that is clearly against the logic and effect of the facts." International Jensen, Inc. v. Metrosound U.S.A., Inc., 4 F.3d 819, 822 (9th Cir. 1993).
Cabalar did not lack counsel in the bankruptcy case. The petition commencing the bankruptcy case was signed by Bada as attorney for Cabalar, as were two additional statements which accompanied the petition. Indeed, the clerk of the court sent three different notices to Bada as attorney for Cabalar: the Order Scheduling Case Management Conference on June 7, 2006; the OSC; and the Order Dismissing Case. Between the time of the OSC hearing on June 14, and entry of the dismissal order by the clerk on June 19, Bada also filed a motion for continuance of a hearing on the motion for relief from stay, together with a Memorandum of Points and Authorities, in which Bada indicated that she was, in her role as Cabalar's attorney, preparing to meet with the U.S. Trustee. In short, prior to dismissal of the case, the bankruptcy court's record contained numerous documents, all of which showed that Bada had appeared and was actively engaged as attorney for Cabalar.
We conclude that the bankruptcy court committed plain error in dismissing the chapter 11 case " due to lack of counsel." A clear error in judgment requires reversal under the abuse of discretion standard. Lundell v. Ulrich (In re Ulrich), 236 B.R. 720, 723 (9th Cir. BAP 1999)(appeals court cannot reverse under abuse of discretion standard unless it has a definite and firm conviction that the bankruptcy court committed a clear error of judgment). The bankruptcy court's decision to dismiss Cabalar's chapter 11 case was based upon a clearly erroneous view of the facts, that Cabalar lacked counsel in the bankruptcy case, and must be reversed.
As opposed to Cabalar's " lack of counsel, " we surmise that it was the bankruptcy court's concern with Bada's attempt to limit her role in representing Cabalar that motivated it to issue the OSC and ultimately dismiss the case. While in its Order Dismissing Case, the bankruptcy court indicates that the reasons for dismissing the case were " set forth on the record at the [OSC] hearing", we were not given a transcript of that hearing. However, we decline to speculate whether the court's reasons for dismissal included cause other than " debtor's lack of counsel." The dismissal order is clear on its face that the dismissal is based upon Cabalar's failure to appear at the OSC hearing, and the sole ground referenced in the OSC for possible dismissal is Cabalar's lack of counsel. Under these circumstances, we must take the bankruptcy court at its word that " lack of counsel" was the sole basis for the court's decision.
B.
Cabalar and its attorney were not given adequate notice of the hearing on the OSC.
On June 7, 2006, two days after Cabalar, acting through its attorney, Bada, filed the chapter 11 petition, the bankruptcy judge signed the OSC directing Cabalar to show cause why the case should not be dismissed. The OSC was not entered until June 8, and set the hearing on the OSC to occur on June 14, 2006. According to the clerk's certificate, the order was not mailed to Cabalar and Bada until Friday, June 9, 2006.
Bada asserts in a sworn declaration that she was unaware of the OSC until a copy of it was given to her at 2:15 p.m. on Wednesday, June 14, 2006, or, in other words, 45 minutes after the hearing was scheduled to occur. Bada further represents that the OSC arrived at her office between 1:00 p.m. and 2:00 p.m. that same day in an envelope bearing a postmark of Monday, June 12, 2006. Bada argues that, given these facts, she and Cabalar were given insufficient notice of the hearing on the OSC which precluded her from responding to the OSC and attending the hearing. As a result, Bada urges, her client was unduly prejudiced by the insufficient notice, in that the chapter 11 case was dismissed.
We find it odd that the OSC, mailed by the clerk of the bankruptcy court on Friday, June 9, did not find its way to Bada's office until the following Wednesday, June 14. Even so, Bada's declaration is unchallenged, and other than the clerk's certificate, there is no reason to suspect that the facts as represented by Bada are incorrect. But even assuming the ordinary course of the mails prevailed, we are comfortable in assuming that the OSC would not have arrived at Bada's office prior to Monday, June 12. Indeed, Rule 9006(f) requires that assumption.
But whether the OSC was delivered to Bada on Monday or Wednesday is of no moment. Under either scenario, Cabalar and Bada were given insufficient notice of the OSC hearing so as to allow them to appear and effectively participate in the proceedings. As a result, Cabalar's due process rights were compromised.
The fundamental component of the right to due process is the right to be heard. Mullane v. Cent. Hanover Bnk. & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). Attendant to this right is the right to sufficient notice of any proceeding which may affect one's rights.
An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.
Id.
Courts have a heightened responsibility to assure that due process rights are respected when a hearing may result in dismissal of the bankruptcy case. " Dismissal is a harsh penalty and is to be imposed only in extreme circumstances." Allen v. Bayer Corp., 460 F.3d 1217, 1226 (9th Cir. 2006); In re Bittleman, 107 B.R. 230, 232 (9th Cir. BAP 1988). Although the bankruptcy court's internal regulations and processes may be taken into consideration, due process considerations concerning dismissal proceedings are paramount. " There are constitutional limitations upon the power of courts, even in aid of their own valid processes, to dismiss an action without affording a party the opportunity for a hearing on the merits of his cause." Societe Int'l v. Rogers, 357 U.S. 197, 203, 78 S.Ct. 1087, 2 L.Ed.2d 1255 (1958).
Under § 105(a), the bankruptcy court undoubtedly had the power, acting sua sponte, to dismiss Cabalar's chapter 11 case for failure to comply with the court's local rules. However, " [e]ven though the court [may dismiss a case] through its general powers under Section 105(a), the concept of procedural due process requires notice and an opportunity to be heard." Tennant v. Rojas (In re Tennant), 318 B.R. 860, 870 (9th Cir. BAP 2004) (affirming the bankruptcy court's dismissal of chapter 13 case for failure to timely file the statement of financial affairs) citing Muessel v. Pappalardo (In re Muessel), 292 B.R. 712, 717 (1st Cir. BAP 2003).
This provision makes clear that a bankruptcy court is not precluded " from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process." § 105(a).
By analogy, if instead of through the bankruptcy court's OSC the dismissal of the bankruptcy case had been requested by motion of an interested party for " cause" under § 1112(b), Cabalar would have been entitled to " notice and a hearing." As a contested matter, Rule 9014(a) would require that Cabalar and Bada be afforded " reasonable notice and opportunity for hearing . . . ." More particularly, under Rule 2002(a)(4), Cabalar (and all other interested parties in the case) would have been entitled to twenty days' notice of the hearing on any dismissal motion. This extended time for notice of a motion to dismiss, as opposed to other types of motions, see Rule 9006(d) (prescribing at least five days notice of a motion hearing), evidences the drafters' intent that dismissal proceedings take place only after ample advance notice is given to those potentially effected.
Under § 102(1)(A), this phrase means " such notice as is appropriate in the circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances . . . ."
Rule 1017(f)(1) prescribes that Rule 9014 (" Contested Matters") governs a request to dismiss a chapter 11 case under § 1112(b).
We do not suggest that the bankruptcy court, acting pursuant to its general powers to enforce its rules, was required to observe the same procedural requirements as would a party seeking the involuntary dismissal of Cabalar's chapter 11 case. See In re Tennant, 318 B.R. at 870 (holding that bankruptcy court was not required to comply with Rule 1017(c) in dismissing, sua sponte, a chapter 13 case). However, the procedural standards established by the Code and Rules support the notion that, when it comes to dismissal of bankruptcy cases, due process demands adequate notice and opportunity to be heard.
Bada declares that the OSC was not received in her office until after the hearing occurred. If Bada received the OSC after the hearing, there was an unquestionable failure of due process. But even assuming the OSC was received by Bada some time prior to the date of the hearing, Cabalar and Bada were given less than three business days' notice of the OSC hearing. Since all of this occurred just a few days after commencement of the chapter 11 case, we do not think Bada and Cabalar should have anticipated that the bankruptcy court would, sua sponte, suggest that the case be dismissed for " lack of counsel." Under these circumstances, we conclude that Bada and Cabalar received insufficient notice of the hearing on the OSC to prepare for, attend, and participate at the hearing, thus depriving Cabalar of its right to due process.
CONCLUSION
We REVERSE the order dismissing the chapter 11 case and REMAND the case to the bankruptcy court.